Shri Mohender Singh Rosy Woolen Mills vs Shri Ranjan Khanna, Dr For The

[Arising out of order-in-original No. 65/Ldh/2004 dated 1.11.2004 passed by CCE-Ludhiana]

1. Whether Press Reporter may be allowed to see the Order for Publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?

2. Whether it would be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?

3. Whether their Lordships wish to see the fair copy of the order?

4. Whether order is to be circulated to the Department Authorities?

M/s. Raja Dyeing

SBM Woolen Mills

Shri BhupinderSingh Rosy Woolen Mills

Shri Satnam Singh Rosy Woolen Mills

Shri Mohender Singh Rosy Woolen Mills Appellants

Vs.

CCE-Ludhiana

Appearance: Shri B.L. Narsimhan, Advocate for the appellant

Shri Ranjan Khanna, DR for the respondent

Coram: Honble Shri Rakesh Kumar, Member (Technical)

Honble Shri S.K. Mohanty, Member (Judicial)

Final Order No. 51927-51931/2015

Per: Rakesh Kumar

The facts leading to filing of these appeals are, in brief, as under:

1.1 M/s. SBM Woolen Mills, Ludhiana (hereinafter referred to as SBM), a partnership concern of two brothers, Shri Satnam Singh and Shri Mohinder Singh, manufacture Grey Acrylic spun yarn. M/s. Raja Dyeing, Ludhiana (hereinafter referred to as RD), a partnership concern of Shri Bhupinder Singh and wife of his brother Shri Satnam Singh manufacturers dyed acrylic yarn. M/s. Rosy Woolen Mills Pvt. Ltd. (hereinafter referred to as RWM) is a Private limited company with Shri Bhupinder Singh, Shri Satnam Singh and Shri Mohinder Singh as its Directors. Shri Bhupinder Singh, Shri Satnam Singh and Shri Mohinder Singh are the real brothers. The period of dispute in this case is from 1/4/1999 to 14/11/2000. During this period, RWM was a trading company.

1.2 SBM and RD face the following allegations of duty evasion:

1.2.1 Allegation against SBM is that during the period of dispute, they were evading duty by grossly under-valuing grey acrylic spun yarn being cleared by them to RD and RWM and the basis of this allegation is that-(a) the price at which the grey acrylic spun yarn was being cleared by SBM to RD & RWM was much less than the cost of production; (b) SBMs sale price to RD & RWM was also much lower than the price at which the spun yarn was being sold to other buyers including a number of buyers who were purchasing the yarn in cash and (c) the circumstances that while the factories of SBM and RD are owned by the RWM and the same had been given on lease by RWM to SBM and RD, no lease rent was being paid and though SBM were selling huge quantity of grey acrylic spun yarn to RD, payment was not being received even after an year, while the same goods were being sold to other customers buying cash at much higher price.

It is on this basis and also on the basis of the allegation that three units SBM, RD and RWM were being run as one unit by the three brothers, Shri Satnam Singh, Shri Mohinder Singh and Shri Bhupinder Singh, it has been alleged that there was mutuality of interest between SBM and RD and hence the sale price of the goods by SBM in respect of their sales to RD cannot be accepted. The Commissioner, therefore, has adopted the average price at which RD during the same period were buying similar grey acrylic spun yarn from other persons. The duty demand of Rs. 5,19,100/- against SBM Woolen Mills is on this basis.

1.2.2 RD during the period of dispute were availing of the exemption under notification no. 5/99 CE and 6/2000 which prescribed a concessional rate of duty for the dyed acrylic spun yarn subject to condition that the same had been manufactured out of the grey acrylic spun yarn on which the appropriate duty of excise under the said schedule has been paid and no credit of Central Excise duty paid on the grey acrylic spun yarn has been taken. The departments allegation is that since in respect of the yarn purchased by RD from SBM, the assessable value had been under-declared by the SBM and accordingly the appropriate duty of excise had not been paid by SBM on the grey acrylic spun yarn cleared by them to RD, in respect of the dyed yarn manufactured and cleared by the RD out of the grey acrylic yarn received by them from SBM, the concessional rate of duty under notification 5/99CE and 6/2000 CE would not be available. The duty demand of Rs. 19,86,648/- against RD is on this basis.

1.2.3 During the period of dispute, SBM were having sales to a number of buyers in cash and also to RWM. The department has alleged that the grey yarn sold in cash to person other than RD has actually been cleared to RD who have used the same for unaccounted manufacture of dyed acrylic yarn and the same had been cleared clandestinely without payment of duty. The duty demand of Rs. 32,64,160/- against RD is on this basis.

1.3 In view of the above investigation, after issue of show cause notice, the Commissioner vide order-in-original dated 1/11/2004 adjudicated this matter and by this order he  (a) confirmed the duty demand of Rs. 5,19,100/- against SBM under proviso to section 11A(1) of Central Excise Act, 1944 along with interest on it under section 11AB and besides this, (b) imposed penalty of Rs. 5,19,100/- on SBM under section 11AC and another penalty of Rs. 50,000/- on them under Rule 173Q (1) of Central Excise Rule, 1944, (c) confirmed duty demand of Rs. 15,14,161/- against RD on account of wrong availment of the exemption under notification no. 5/99CE and 6/2000-CE under proviso to section 11 A(1) of the Act along with interest on it under section 11AB and also confirmed the duty demand of Rs. 36,78,122/- against RD under proviso to section 11A(1) of the Act on the account of the allegation of clandestine removal along with interest on it under section 11AB and besides this, imposed penalty of Rs. 51,92,283/- on RD under section11AC and another penalty of Rs. 5 lakh on them under section 173Q (1) of the Central Excise Act, 1944 and (d) imposed penalty of Rs. 5 lakh each on Shri Satnam Singh, Shri Mohinder Singh and Shri Bhupinder Singh under Rule 209A of Central Excise Rules, 1944. Against this order of the Commissioner, these appeals have been filed.

2. Heard both the sides.

3. Shri B.L. Narsimhan, Advocate, ld. Counsel for the appellants, pleaded that the allegation of under valuation against SBM in respect of sales to RD is without any basis; that SBM, RD and RWM are three independent entities having their premise at different places; that while RWM is a private limited company with Shri Bhupinder Singh, Shri Satnam Singh and Shri Mohender Singh as its Directors, SBM is partnership concern with Shri Satnam Singh and Shri Mohinder Singh as its partners and RD is a partnership concern with Shri Bhupinder Singh and wife of Shri Satnam Singh as its partners; that there is no evidence that these three units were being run by a single person as one unit or that only one person was having all pervasive control over the functioning of these three units; that in view of this, SBM and RD and RWM cannot be treated as related persons and the price at which the grey acrylic spun yarn was sold by SBM to RD cannot be rejected; that in any case, there is absolutely no justification for the Commissioner to adopt the average price at which the grey acrylic yarn was being purchased by the RD from various other yarn suppliers as the assessable value of the grey acrylic spun yarn being sold by the SBM to RD and this is contrary to the provision of section 4 of the Central Excise Act, 1944 and the Central Excise Valuation Rules, 1975/2000; that the percentage of sales made by SBM to RD and RWM and others would clearly shows that huge quantity of sales were being made to other unrelated buyers; that in such a situation, since the factory gate price was available, discarding the same and charging the duty from SBM on the average purchase price of the grey acrylic spun yarn by RD is absolutely without any basis; that the price at which the grey acrylic spun yarn was being sold by SBM to RD is comparable with the price at which the same acrylic spun yarn was being sold to other independent buyers and in these circumstances, there was absolutely no justification for rejecting the assessable value adopted by SBM; that since the case of under valuation against SBM in respect of the sales to RD is not sustainable, the allegation of wrong availment of the exemption notification no. 5/99 and 6/2000 CE by RD on the ground that appropriate duty has not been paid by SBM would also not sustainable; that in any case, even if in respect of the grey acrylic spun yarn sold by SBM to RD, there is dispute about assessable value and the department alleges that SBM had not discharged full duty liability, exemption notification no. 5/99 and 6/2000 CE cannot be denied to RD in respect of the finished yarn (dyed yarn) manufactured and cleared by them out of the grey acrylic spun yarn purchased from SBM; that the condition for exemption under notification no. 5/99 and 28/1999CE is that the dyed yarn has been manufactured out of the yarn on which appropriate duty of excise and the special duty of excise leviable under said schedule to the Central Excise Tariff Act, 1985 or as the case may be, the additional customs duty leviable under the Customs Tariff Act, 1975 has been paid and no credit of the duty paid on the grey yarn or other inputs had been availed; that in this regard, the expression appropriate duty of excise under the said schedule has to be interpreted as payment of duty at the correct rate; that in this regard he relies upon the judgment of the Apex Court in the case of Commissioner of Central Excise Vadodara Vs. Dhiren Chemical Industries reported in 2002 (139) ELT 3 (S.C.) in para 5 of which the Apex Court has held that the word appropriate used in the notification in the context means the correct or the specified rate of duty; that since the duty has been paid at the correct rate, just because, there is dispute about valuation and according to departments allegation, SBM has under valued their goods, benefit of exemption notification cannot be denied to RD who had used the goods manufactured and cleared by SBM for manufacture of processed/dyed yarn; that in view of this, in any case, the duty demand of Rs. 19,14,648/- against RD on account of the wrong availment of exemption notification is not sustainable; that as regards the duty demand of Rs. 36,78,122/- confirmed by the Commissioner against RD on the basis of allegation of clandestine clearances, this duty demand is based on the assumption that the entire quantity of grey acrylic spun yarn sold by SBM to a number of buyers in cash and to RWM has actually been received by RD and the same has been used for unaccounted manufacture of dyed yarn by RD, which had been cleared without payment of duty; that there is absolutely no evidence in support of this allegation, that absolutely no enquiry has been conducted with the buyers who had been purchased grey acrylic spun yarn from SBM to ascertain as to whether the yarn had actually been delivered to RD, that similarly, there is absolutely no evidence on record to prove that the grey acrylic spun yarn sold to RWM had actually been used by RD and that in view of this, the duty demand of Rs. 36,78,122/- is also not sustainable.

4. Shri Ranjan Khanna, ld. DR defended the impugned order by reiterating the findings of the Commissioner. With regard to the duty demand of Rs. 5,19,100/- against SBM, he pleaded that - (a) three units-SBM, RD and RWM are being run by the same brothers, Shri Mohinder Singh, Shri Satnam Singh and Shri Bhupinder Singh, as While these three brothers are the Directors of RWM, Shri Satnam Singh and Shri Mohinder Singh are the partners of SBM and Shri Bhupinder Singh and wife of Shri Satnam Singh are the partners of RD; that the plant and machinery of SBM and RD is actually owned by RWM and during the period of dispute, in order to evade the duty, RWM had become a trading unit and SBM and RD had become manufacturing units by taking the plant and machinery of RWM by SBM and RD on loan but during the entire period of dispute, the lease rent was not being paid by SBM and RD to RWM; that the sales were being made by SBM during the period of dispute to RD and RWM on credit but the payment was not even being received even after an year; that these circumstances and a number of other circumstances clearly indicate that SBM, RD and RWM were being run by the three brothers as one entity and hence, there is mutuality of interest between SBM on one hand and RWM and RD on the other hand; that during the period of dispute, the price at which grey acrylic spun yarn was being sold by SBM to RD and RWM was less than its cost and was even less than the price at which the same yarn was being sold to other buyers in cash; that in these circumstances, the Commissioner has rightly rejected the assessable value adopted by SBM in respect of their sales to RD and RWM and has determined assessable value on the basis of average purchase price of grey acrylic spun yarn by RD from other suppliers; that in view of this, the duty demand of Rs. 5,19,100/- has been correctly confirmed against SBM; that since SBM in respect of the yarn sold by them to RD had not paid the appropriate Central Excise duty leviable, RD would not be eligible for exemption under notification no. 5/1999CE and 6/2000 CE in respect of the dyed yarn manufactured by them out of the grey acrylic spun yarn purchased from SBM, as one of the condition for exemption under these notifications is that the appropriate duty of excise should have been paid on the grey acrylic spun yarn; that the term appropriate duty of excise means the correct quantum of duty of excise payable on the goods, that is, payment of duty not only at the correct rate of duty but also on the correct value; that the expression appropriate duty of excise used in these notifications cannot be construed as payment of duty at the correct rate; that even in terms of Apex Courts judgment in case of Collector of Central Excise Varodara Vs. Dhiren Chemical Industries (supra) which has been relied upon by the appellant, the Apex Court in para 6 of the judgment has observed that for the purpose of getting the benefit of exemption under the notification the goods must have been made from the raw material on which the excise duty has, as a matter of fact, been paid at the appropriate or correct rate and unless the manufacturer has paid the correct amount of excise duty, he is not entitled to the benefit of exemption under the notification; that in this judgment, the Apex Court was interpreting an exemption notification where the exemption was available subject to condition that the goods are manufactured from the raw material on which appropriate amount of duty of excise has already been paid; that applying the Apex Courts judgment in the case of Dhiren Chemical Industries (Supra), the exemption in respect of dyed yarn would be available to RD only if in respect of grey acrylic spun yarn the correct amount of duty had been paid; that since in this case correct amount of duty has not been paid, the benefit of exemption no. 5/1999 and 6/2000 CE has not been correctly availed; that as regards the duty demand of Rs. 36,78,122/-, during the period of dispute, while SBM was selling the grey acrylic spun yarn to RD and RWM at the price below the cost of production, they were showing huge profits from the sale of Shawls; that enquiry with the suppliers of this Shawl and buyers of the Shawl revealed that both were fictitious; that this shows that the sale of Shawls by SBM was bogus; that SBM was clearing the under valued yarn to RWM and RWM were selling only dyed yarn at much higher rate; that from this it is apparent that the grey acrylic yarn shown to have been sold to RWM had actually been diverted to RD where the same had been dyed and removed clandestinely; that there was no justification for SBM to sell the grey acrylic spun yarn to RWM, who was selling only dyed yarn, that similarly, there was no justification for cash sale of the grey acrylic spun yarn by SBM to other buyers that the entire quantity of grey acrylic spun yarn shown to have been sold by SBM to a number of other buyers in cash and to RWM has actually been diverted to RD from where the same had been cleared, clandestinely after being subject to dyeing and that in view of this, the duty demand of Rs. 36,78,122/- is on strong footing.

Shri Khanna accordingly pleaded that there is no infirmity in the impugned order.

5. We have considered the submissions from both the sides and perused the records.

6. The first point of dispute is about the duty demand of Rs. 5,19,100/- confirmed against SBM on the base of allegation of under valuation. The evidence relied upon by the department in support of the allegation of under valuation against SBM is that-(a) all the three entities, SBM, RD and RWM are being run as one business concern and are being controlled by the same persons in as much as-(i) while SBM is a partnership concern of Shri Satnam Singh and his brother Shri Mohinder Singh, RD is a partnership concern of Shri Bhupinder Singh (brother of Shri Satnam Singh) and wife of Shri Satnam Singh, RWM is a private limited company with the three brothers, Shri Satnam Singh, Shri Bhupinder Singh and Shri Mohinder Singh as its Directors who have 100% share holding in RWM and thus, the three firms are controlled by the three brothers; (ii) while SBM and RD have taken the plant and machinery on lease from RWM, no lease rents were being paid by SBM and RD to RWM; (iii) while SBM was selling grey acrylic spun yarn to RD as well as RWM on credit at a price below the cost price and much lower than the price at which same goods were being sold to other independent buyers in case, huge amount of payments were outstanding from RD and RWM; (iv) while SBM running into losses, RWM was making profits and (v) this shows that there is flow of funds from SBM to RWM and these entities have been created to evade the tax.

6.1. In view of the above evidence, we are of the view that it is the same group of persons, the three brothers, Shri Satnam Singh, Shri Mohinder Singh and Shri Bhupinder Singh who have all pervasive control over SBM, RD and RWM and the three units are being as one entity and the separate firm/company have been created for reducing their tax liability. There is no explanation as to why SBM in respect of their sales to RWM and RD being on long term credit, are selling goods to RWM at a price much below the cost of production and also much below the price at which the same goods were being sold during the same period to other independent buyers on cash payment. In view of these circumstances, we hold that there is mutuality of interest between SBM and RWM, and therefore, in respect of the SBM sales to RWM, the sale price of SBM cannot be accepted as assessable value. However, in our view, the Commissioners decision to adopt the average sales price at which the grey acrylic spun yarn was being purchased by RD from other suppliers would not be correct and that the correct assessable value in respect of the sale of grey acrylic spun yarn by SBM to RWM and RD would be the average price at which SBM were selling the same goods to other independent buyers during that period. Accordingly, the assessable value has to be determined on this basis and the duty demand has to be quantified.

7. The second point of dispute is regarding duty demand of Rs. 15,14,161/- against RD on the basis of wrong availment of exemption notification no. 5/99 and 6/2000 CE. Under these notifications concessional rate of duty in respect of the dyed yarn is available only if dyed yarn has been manufactured out of the yarn on which  appropriate duty of excise and special duty of excise leviable under the schedule to the Central Excise Tariff Act, 1985 or as the case may be, the additional customs duty leviable under Customs Tariff Act, 1975 has already been paid and no credit under Rule 57A Rule 57B or 57Q of Central Excise Rules, 1944 has been availed in respect of the process dyeing, printing, bleaching or mercerizing in the manufacture of dyed, printed bleached or mercerized yarn. In this case, there is no dispute that RD have not availed the CENVAT Credit in respect of the inputs or capital goods. The only point of dispute is as to whether the grey acrylic spun yarn purchased by them from SBM which was dyed by them can be treated as the yarn on which the duty of excise under Schedule to the Central Excise Tariff Act, has been paid.

According to the department since SBM have not discharged full duty liability in respect of the grey acrylic spun yarn cleared by them to RD, as they have deliberately under valued the yarn, the yarn purchased by RD from SBM cannot be said to be yarn on which the appropriate duty of excise has been paid. The appellant plead that the expression appropriate duty of excise under the said schedule means the payment of duty at the appropriate rate not the appropriate quantum. In support of their respective plea, both the department as well as the appellants rely upon the Apex Courts judgment in the case of Dhiren Chemical Industries Vs. CCE-Vadodara reported in 2002 (139) ELT 3SC. While Shri B.L. Narsimhan, ld. Counsel for the appellants points out the Apex Courts observations in para 5 of the judgment that word appropriate in the context means the correct or the specified rate of duty and on this basis Shri Narsimhan, has pleaded that payment of appropriate duty of excise under the schedule to the Central Excise Tariff Act, 1985 means payment of duty at the applicable rate and that it need not be the correct quantum of duty on the correct value, Shri Ranjan Khanna, the ld.

DR on the other hand points out to the Apex Courts observations in para 6 of the judgment that unless the manufacturer has paid the correct amount of excise duty, he is not entitled to the benefit of the exemption under notification and on the basis of this observation, Shri Khanna pleads that the expression appropriate duty of excise under the said schedule to Central Excise Tariff Act, 1985 means payment of correct amount of excise duty, i.e., excise duty not only at the correct rate but also on the correct value, if the rate of duty is ad-valorem.

7.1. On considering the rival submissions of this point, we are of the view that point of dispute in the case of CCE-Vadodara Vs. Dhiren Chemical Industries (supra) decided by the Apex Court in the judgment mentioned above was as to whether the payment of duty at nil rate can be treated as payment of appropriate amount of duty. This judgment is in the context of an exemption notification which exempted finished goods subject to condition that the same have been manufactured out of the raw material on which appropriate amount of duty of excise has already been paid. In the case of Dhiren Chemical Industries the inputs out of which the goods had been manufactured were fully exempted from duty under an exemption notification and point of dispute was as to whether the inputs/raw material in these circumstances can be treated as the goods on which appropriate duty of excise had already been paid. This question was answered by the Apex Court in the negative observing that where the raw material is not liable to excise duty or such duty is nil, no excise duty is, as a matter of fact, has been paid upon it and to the goods made out of the such raw material, the notification will not comply.

The judgment is an authority for the point of dispute it has decided and therefore, in our view, the Apex Courts judgment in the case of Shri Dhiren Chemical Industries cannot be treated as an authority about how the expression appropriate duty of excise under the said schedule has been paid is to be construed-whether it means payment of duty at the correct rate or whether it means payment of correct amount of duty, i.e., payment of duty not only at the correct rate but also on the correct value in case the rate of duty is ad-valorem. The expression appropriate duty means the applicable or the correct duty. The rate of duty on any the goods, as specified in the schedule to the Central Excise Tariff Act, 1985 read with exemption notification, if any, can be either specific rate or an ad-valorem. In case the rate of duty is specific, payment of duty at that rate would result in payment of appropriate duty. However, if the rate is ad-valorem, the payment of correct duty would involve not only the payment on the correct rate but also on the correct value. Therefore, in our view, the word appropriate duty of excise under the said schedule means the payment of correct amount of duty, i.e., the payment of duty not only at the correct rate but also on the correct value.

Therefore, if in the present case, however, in respect of grey acrylic spun yarn, the duty has been short paid by taking recourse to under-valuation, the grey acrylic spun yarn cannot be said to be the goods on which the appropriate duty has been paid and hence, the dyed yarn made out of grey yarn would not be eligible for exemption. However, if SBM pay the differential duty on the clearance of grey yarn to RD, as determined by the assessing officer, the exemption notification no. 5/99 and 6/2000 CE would be applicable in respect of the dyed yarn manufactured out of grey yarn received from SBM.

8. Coming to the duty demand of Rs. 36,78,122/- against RD, this is based on the allegation that all the clearances of grey acrylic spun yarn by SBM to RWM and to other buyers who have purchased in cash have actually been diverted to RD who have used the same for unaccounted manufacture of dyed yarn which had been cleared clandestinely without payment of duty. On going through the records, we find that this allegation is based only on the presumption and there is absolutely no evidence to substantiate the same. Even if there is mutuality of interest between SBM and RD on one hand and SBM and RWM on the other hand, it cannot be presumed that the yarn sold by SBM to RWM had actually be diverted to RD who had used it for unaccounted manufacture of died yarn. In view of this, we hold that duty demand of Rs. 36,78,122/- is not sustainable and is to be set aside.

9. In view of the above discussion, while the duty demand of Rs. 36,78,122/- against RD based on the allegation of clandestine removal is set aside, in respect of the duty demand of Rs. 5,19,100/- against SBM and duty demand of Rs. 15,14,161/- against RD, the same is set aside and the matter is remanded to the Commissioner of de-novo adjudication. In the de-novo proceedings, the Commissioner must first determine the assessable value of the grey acrylic spun yarn sold by SBM to RD, on the basis of the average price at which SBM had sold the same yarn during that period to other independent buyers and on this basis the duty demand against SBM is to be quantified. Once, the Commissioner gives the finding that SBM had short paid the duty in respect of their clearance on grey acrylic spun yarn to RD, the duty exemption under notification no. 5/99 and 6/2000 CE to RD would not be available to RD, unless SBM pay the differential duty in respect of the grey acrylic spun yarn sold by them to RD and if they do not pay the differential duty, the duty demand of Rs. 15,14,161/- against RD would have to be upheld. The quantum of penalty on SBM and RD under section 11AC and other appellants, that is, Shri Satnam Singh, Shri Bhupinder Singh and Shri Mohinder Singh under Rule 209A of the Central Excise Rules, 1944 would be according to the quantum of duty demand confirmed against SBM and RD.

10. The appeals stands disposed off, as above.

(order pronounced on 17/6/15)

(Rakesh Kumar)

Member (Technical)

(S.K. Mohanty)

Member (judicial)

Ritu

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